Special Topic: Cancellation of Customer Contracts

SAP has introduced enhancements to SAP Business ByDesign to allow customers to comply with accounting standard IFRS 15/ASC 606 revenue recognitions requirements. The series of case documents introduces the key requirements of IFRS 15 /ASC 606 along with steps to be taken by the client to implement the new functionality.

This special topic document focuses on:

Shortening of sales order items in quantity

Cancellations of customer contract items

Business Scenario

An agreement with a customer is a plan to fulfil by delivery or servicing, but reality might show that either fulfilment is not necessary any longer, not possible or the agreement is to be changed for other reasons. For sales orders, a quantity to be delivered might get decreased, for customer contracts the duration might have been shortened or extended. In both cases, agreed prices and discounts might change as well. Speaking in IFRS15/ASC606 terms, the allocation base and the percentage of completion changes.

Cancellations are:

A sales order item for a product is being cancelled (reason for rejection set).

A sales order item for a service is set to complete

with a service confirmation (fewer hours / services recorded, released with order completion) or

pressing the button “complete execution”.

Cancellation of a customer contract or item using the cancellation functionality.

For sales orders, changes in the allocation bases that occur after start of fulfilment are only reflected after “final accrual”, i.e. all items assigned to the RAC must be either cancelled or fulfilled and invoiced.

With release 1811, the system behavior when cancelling a customer contract has been improved. It is now possible, when executing the cancellation, to change the quantity and pricing, to reflect the new agreement. The change is immediately reflected in the allocation base and applied, in terms of the accounting standard, retrospectively. A corrective catch-up posting will be executed at the next revenue recognition run. This happens for current or previous periods.

Overview

Example: Shortening of a customer contract item

A customer contract has a duration of 3 years. Nevertheless, the customer cancels the contract, remaining period to run (until “effective on”) date is 24 months. The sales agent enters the cancellation, and reduces the quantity to 24. The allocation base gets corrected immediately. The next revenue recognition run corrects postings retrospectively, if needed.